In a speech at the British Bankers’ Association last Monday, Chairman of the British Financial Services Authority (FSA) Adair Turner summarized the priorities of the FSA in the realm of consumer protection.
In the past - he argued - the FSA-approach was guided by the belief that the crucial thing the FSA needed to make financial services markets work well for consumers was transparency - fair disclosure of terms and fair sales processes. As it turned out, the results of this approach were not encouraging. The main reason for this failure has to do with the special characteristics of many financial services:
- Financial services are credence goods - their quality can often only be assessed after years.
- Consumers are relatively unused to buy financial services - a pension or life police is only purchased once or twice a life - hence consumers can only insufficiently learn from their experience.
- There is a great asymmetry of information and knowledge between consumers and producers.
- Financial services are inherently complex - and sometimes even simple products are made opaque if that helps producers make money.
As a result, the FSA has moved to a more interventionist approach four years ago. One example of this new approach is to be found in the retail distribution review. The review questioned whether commission-based remuneration is appropriate rather than simply investigating whether commission levels are well disclosed. As a result of this review, from January 2013 consumers will know that an independent adviser is not being paid by producer commissions, and therefore not incentivised to recommend a particular product or provider.
Such an approach also necessitates new instruments. These include, inter alia:
- to spot risks earlier by means of a horizon-scanning function, analysing trends in the economic and market environment to identify potential risks to consumers.
- to examine firms’ business models to understand the drivers of profitability and the implications of firms’ strategies. As part of this work the FSA will scrutinize reward structures for in-house sales staff, to assess whether sales incentives are well-designed to guard against mis-selling.
- to look whether firms have product development and approval processes well-designed to weed out harmful or inappropriately marketed products.
Lord Turner underlined that such a more interventionist approach was also a more political one. In light of the fact that the responsibility for consumer protection will move to the new Consumer Protection and Markets Authority in 2012 he urged all stakeholders to engage in a debate how far a consumer protection mandate should reach.
Source: FSA, The Economist